The slide in the foreign and domestic investment continues unabated with tumbling imports of capital goods and shrinking private sector bank borrowings for machinery and equipment.

According to central bank data, machinery imports fell by a hefty 24.7 per cent over the third quarter of 2018-19, after a sharp drop of 17.9pc and 19.3pc was recorded for the first and second quarters respectively.

“Industrial growth is not expected to rebound notably in the current year,” says the State Bank of Pakistan’s third quarterly report of 2018-19, as the federal budget 2019-2020 “is likely to keep disposable incomes and domestic demand under check”.

No doubt the government is conscious of the importance of industrial investment but it is constrained by the stabilisation programme. Prime Minister Imran Khan told the representatives of the Lahore Chamber of Commerce and Industry (LCCI) on July 18 that industrial growth is imperative for national development.

He promised to consider offering investors low-cost credit for the purchase of machinery and equipment. Mr Khan was responding to a proposal of LCCI president Almas Hyder for creating a credit line at a subsidised rate of 6pc for industrial investment.

The current high central bank policy rate is not justified because inflation is fluctuating within a single-digit band and the exchange rate has reached its equilibrium price

Apart from adverse utility prices and taxation factors, capital spending is hamstrung by the continuing interest rate hike and steep devaluation both of which, some financial analysts say, need to be stabilised to spur capital spending. They argue that the current high central bank policy rate is not justified because inflation, though high, has fluctuated within a single-digit band for the past few months and the exchange rate has also reached its equilibrium price.

And without rapid import substitution and export-oriented industrialisation to reduce trade and current account deficits, there is no way to achieve balanced and sustained economic growth in a debt-driven economy.

“The gap is widening between savings and investments, which pushes the country to seek foreign assistance,” cautions the newly appointed prime minister’s special advisor and former SBP Governor Dr Shamshad Akhtar. She acknowledges that the major economic challenge is high consumption, low production and low savings and investment. The International Monetary Fund figures show that 27pc of the fiscal deficit is currently financed by external sources.

Meanwhile, the advisor on industries, production and investment Abdul Razak Dawood told a delegation of the US-Pakistan Business Council recently that Special Economic Zones (SEZs) will allow (one-time) duty-free imports of machinery besides a tax holiday for 10 years.

However, the 10-year tax holiday is likely to become time barred soon because under the SEZ Act it is available only for those units which go into production by June 2020. None of the SEZs have been put in place. Those units that go into production after June 2020 are eligible for a five-year tax holiday.

The Board of Investment is now working on a new incentive package. The current year’s budget has allocated Rs1.4 billion for extending various facilities for the nine SEZs planned under the China-Pakistan Economic Corridor (CPEC) programme. However, the provision of electricity to the SEZs alone will require a hefty amount of Rs18.5bn. Informed about the progress of SEZs, the members of the Senate’s special committee on the CPEC project responded with a consensus: “work on CPEC projects is not going at the pace that is the need the hour”.

The industry representatives see the reduction and subsequent withdrawal of tax credit for balancing, modernisation and replacement, which they say is required for improving productivity and quality of industrial output, as regressive. While duties on raw materials have been slashed, it is pointed out that the intermediate items have been excluded.

According to president of Pakistan Businessmen and Intellectual Forum, “the political situation is not calm, the stock market and industries are worried and confused while economic indicators are worsening.”

“There will be a disruption and upheaval in the economy as a result of meaningful tax reforms taking place, and a large expected rise in unemployment,” says economist Saqib Shirani. He feels that “the government will have to formulate a thought-out growth framework with an industrial and investment policy as its elements, and begin implementing these as stabilisation policy creates the space.”

The IMF programme “has not lifted the sagging spirit of market participants, reflecting the uncertainty about the future economic outlook”, says former Finance Secretary Waqar Masood Khan. In a recent article titled Elusive Economic Stability, he wrote that the risk of business defaults has increased while observing that “some experts fear that slowing down aggregate demand is being strangulated to a point that could result in a recessionary wave”.

Even the IMF is worried about the political risks of stabilisation and structural reforms. The IMF representative in Islamabad Teresa Daban Sanchez sees significant risk to the Fund’s programme from a failure to build a political consensus around key components that require legislative approval of the Senate and parliament.

Looking at the big picture, Chief Justice of Pakistan Asif Saeed Khosa suggests that we have to come up with a charter of governance to ensure that such (past) mistakes are not repeated in the future. Apart from the much talked about charter of economy, a PPP leader has come up with a proposal for evolving a ‘charter of common man’. The calls for these charters do pinpoint the underlying problems responsible for the current financial/economic crisis and the need to democratise the economy.

Despite many memorandums of understandings, worth billions of dollars, signed with foreign firms over the last 11 months, there is nothing as yet to show on the ground. The business confidence in the current economic outlook is at a low ebb. The investors are awaiting the return of a congenial environment to start capital spending.

Published in Dawn, The Business and Finance Weekly, July 29th, 2019